The once and future e-book: on reading in the digital age

An e-book veteran looks at the past, present, and future of the business.

The final boss

If it seems like I've spent an inordinate number of words vainly chastising the book-reading public for its stubbornly illogical tastes, rest assured that I believe the bulk of the blame lies elsewhere. It's just that the guilty party's actions follow a formula that is familiar to the point of cliché.

Stop me if you've heard this one before.

A group of media owners with a comfortable, well-established business model is faced with new digital technology that threatens to change the landscape of the market. At first, the media owners ignore the new technology. Long after it has become apparent that this is an untenable strategy, the media owners reluctantly submit to the long-standing chorus of requests to provide their content in digital form. However, all digital distribution is contingent upon the most draconian digital rights management scheme that the media owners can shove down the distributors' collective throats.

While this DRM is intended to protect the media owners' rights and prevent the illegal distribution of perfect digital copies of their content, it actually has no effect on piracy. Every piece of digital media that is in demand is supplied for free, whether by cracking the DRM, copying an unprotected digital source, or synthesizing a new digital copy from an unprotected analog source. What the DRM does do is frustrate legitimate users and stifle the fledgeling market for digital distribution.

DRM: a refresher course

To most people who follow the technology sector, this kind of story is old news. But just in case you find yourself faced with the task of explaining the futility of DRM to a layperson, let me briefly summarize one of the best techniques I've seen. (I believe I first saw it in a video of a lecture delivered by a guest speaker at Microsoft, though I could be mistaken. Update: It was Cory Doctorow in 2004.)

In academic circles, the fictional characters Alice and Bob are often used to explain various methods of communication. Alice needs to get some message to Bob, but there is some sort of enemy—often named Eve, which is short for eavesdropper—that wants to intercept the message.

To use this technique, you should do the traditional Alice and Bob setup, then proceed to explain the various forms of cryptography: Alice and Bob could share a secret piece of information before separating from each other, thus allowing them, and not Eve, to encrypt and decrypt their messages; or they could use a form of public key cryptography which allows Alice and Bob to have their own, private secrets that do not need to be coordinated and shared; and so on. Explain these concepts to a depth that you and your audience are comfortable.

By this point, a layperson's head is usually spinning thanks to all the technical jargon, but they should be thoroughly convinced that there are some very powerful tools for protecting information. You should now bring the subject back around to DRM and digital media distribution. This is when you land the killing blow.

Your audience now understands that the purpose of DRM is to prevent consumers from making illegal copies of the media that they have purchased. It is only natural for them to assume, after the long explanation of cryptography featuring Alice and Bob, that the law-breaking consumer fills the role of the devious Eve, and is thus faced with daunting task of overcoming all that clever math to get at the protected information. But that's not the full story.

The consumer is also Bob. He is the intended recipient of the "message," whether it be a song or a video or text. He must be given all the tools required to decrypt and consume the information!

At this point, the hope is that clouds will part and the layperson will finally grasp the inherent paradox of DRM.

Now, a technically savvy person may try to emphasize the subtle distinction between the device-as-recipient and the human being, but in this case, the layperson's instincts are correct. That distinction is significant only insofar as it slightly delays the discovery of the decryption key and mechanism. But this information is always in the consumer's possession. All of the mathematical and algorithmic strength of cryptography goes out the window when that is the case. What remains is merely security through obscurity. (Please save your always-network-connected DRM dystopias for the comments section; I'm confining this discussion to the present and near-future.)

Nuances aside, the big picture remains the same: DRM for digital media distribution to consumers is a mathematically, technologically, and intellectually bankrupt exercise. It fails utterly to deliver its intended benefit: the prevention of piracy. Its disadvantages, however, are provided in full force: limiting what consumers can legally do with content they have legitimately purchased, under threat of civil penalties or criminal prosecution.

Live and don't learn

Publishers saw what happened to the music business and they were shaken to the core.

Back to our content owners. For music, there are record labels; for movies, there are studios; for books and printed media of all kinds, there are publishers, and they make the music and movie folks seem positively progressive.

You'd think that publishers would have learned from the travails of the music and movie folks, and they did, in a way. Unfortunately, what they learned was fear. Early on, publishers saw what happened to the music business when Napster arrived on the scene, and they were shaken to the core. In fact, some of the very same executives, casualties of the the digital music wars, ended up at publishing houses, arriving with the digital equivalent of PTSD and harrowing tales of a business model's collapse. And so, the order of the days was "DRM everywhere," or, just as likely, "no digital distribution at all."

This position is even more insane once you understand how the traditional, non-digital publishing business works. As in the music and movie industries, there's the usual, shockingly small cut given to the actual content creators, plus the physical mechanism of manufacturing and distributing the products. In the case of books, there's an extra dose of nonsense layered on top. Here's an excerpt from a Salon.com article on the topic.

Books are sold to retailers in a process that resembles consignment. Bookstores pay for the books they order, but they are able to return any unsold books for a full refund (though they usually have to pay shipping). This practice began during the Depression, when publishers wanted to keep selling books in bad economic times, and it continues today despite frequent calls for its abolition.

This means that if a publisher ships 100 copies of a book to a bookstore and only 50 sell, the remaining books are shipped back and the bookseller is given credit for them. (The returned books are sometimes destroyed, although increasingly they are sold to "remainders" dealers who in turn supply retailers with reduced-price sale books.) The estimated cost of these returns is also figured into the price of a book.

"When you're buying a book, you're not only paying for that book, but you're also paying for the book that will be returned and destroyed," explains Jason Epstein, former editorial director at Random House.

For an even more sobering look at the brass tacks of this business, read this complete example with actual numbers. It'll surely seem byzantine to an outsider, but that's the point. Really try to power through the whole thing if you want a clear picture of the pre-digital status quo in the publishing business.

Now imagine an e-book entrepreneur coming to a publisher and offering to sell digital copies of the publisher's books at retail. His proposition is simple. The publisher will provide a digital representation of a book. The e-book entrepreneur will format it for reading on one or more devices and sell it through a web site (or, in the very early, pre-Internet-penetration days, a physical kiosk in a store somewhere). For each e-book sold, the e-book entrepreneur will pay the publisher a royalty, traditionally about half of the list price.

(Note that the list price is not the price the book was sold for, which is typically much lower. For example, a book sold for $12.99 may have a list price of $20.00. With a 50% royalty, that means $10.00 of the $12.99 sale goes to the publisher, leaving $2.99 for the e-book seller. Some royalties are based on the sale price instead (with or without tax), and some are even fixed amounts on specific books, but the "percentage of list price" royalty deal is extremely common, and imposes a clear lower bound on the sale price of an e-book.)

What are the publisher's costs for this deal? Well, there may be a one-time, fixed cost to prepare a digital incarnation of the book to hand over to the e-book seller. But the publisher probably already has such a thing, e.g., for use in the editing process prior to traditional print publishing. In fact, these days, most authors produce the original work in digital form to begin with.

Let's see, what else? Um, that's it. The publisher hands over a file. Then, every month, a check arrives from the e-book seller. There is no additional cost to the publisher per unit sold. There are no printing costs, no warehousing, no trucks or planes to deliver merchandise. There's no forecast of demand, with the accompanying dire consequences of unsold inventory or unrealized income if the predictions are wrong one direction or the other. There's no tracking of and accounting for unsold books, no retailers cutting the covers off of paperbacks and shipping them back to the publisher as proof of their destruction. (These days, an affidavit is accepted as proof of the books' destruction, which is only slightly less wasteful and absurd.)

In short, the terms are unbelievably favorable for publishers. It essentially moves them from print publishing margins to software publishing margins: pay once for the creation of the content, sell an infinite number of times with no additional per-unit cost.

And the downside? "Piracy!" the publishers cry. "This is exactly what happened to the music business!" This is a good place to point out yet another reality not recognized by this panic over digital distribution. Whether or not publishers choose to sell e-books, digital versions of their content are already available online thanks to OCR (etc.) and, in the case of the most popular books, collaborative transcription. (For example, when photographs depicting all 759 pages of the final Harry Potter book were leaked, the entire book was transcribed before the official release date of the printed book.)

To sum up, e-books have an incredible upside for publishers and little to no downside, since all the things publishers fear will happen as a consequence of selling e-books have already happened, and will continue to happen with or without the widespread sale of e-books.

I can't stand it, I know you planned it

So, how did publishers actually respond to content requests from e-book vendors? When e-book vendors weren't ignored entirely, they were usually met with one hard and fast rule: "You will not get our content unless you protect it with DRM!" In the case of Peanut Press, one publisher actually commissioned an expensive, defense-level security analysis of Peanut's DRM technology. Only if it was given a passing grade would this publisher supply Peanut Press with any of its content. (It passed…with the caveat that brute-force attacks would likely become feasible in a decade or so.)

And even when a deal for content was struck, the very best content was often withheld, if not outright, then effectively, through the use of financial barriers. For the e-book rights to certain popular novels, publishers sometimes wanted a large sum of money up front. Other e-book rights, such as those for the Harry Potter novels, were unavailable at any price. (Believe me, we asked.)

Along similar lines, most publishers dictated list prices for e-books that were based on the prices of the printed versions. When a book was available only as a hardcover, the list price of the e-book version was the hardcover list price. Later, when the book became available as a paperback, the e-book list price was reduced to match the paperback price. This, despite the fact that the e-book version remained unchanged during this time. Pricing based on cost and demand is all well and good, but it should be the cost and demand of the actual product for sale, not another product with entirely different costs and demand!

This makes absolutely no sense until you look at it not as a way to sell e-books, but rather, as a way to ensure that e-book sales do not eat into hardcover sales. That, in turn, makes even less sense, given the comparative profit margins of hardcover books and e-books, but, well, there you have it.

The unchanged nature of an e-book during the hardcover-to-paperback transition of the physical book brings up another issue. The digital text supplied to e-book vendors was often rife with typos. And the kicker: e-book vendors were not allowed to correct these typos. This fell under the contract clause that forbade all modifications to the text. The only recourse an e-book vendor had was to inform the publisher of the error and request a corrected copy. Some publishers proved "less than responsive," let us say, to such requests.

All of this is to say that the publishers effectively sabotaged the e-book market from day one. The DRM, the pricing, the general treatment as second-class citizens, it all added up to an insurmountable drag on a budding industry. Without some minimum level of buy-in from content owners, there was simply no way to break through to the mainstream, no way to ever sell enough copies of those popular novels to recoup a large up-front fee, and no way to persuade content owners to allow the most desirable best-sellers to be sold in e-book form.

John Siracusa / John Siracusa has a B.S. in Computer Engineering from Boston University. He has been a Mac user since 1984, a Unix geek since 1993, and is a professional web developer and freelance technology writer.